Legislation and proposed legislation
New foreign resident withholding tax regime now applies
The new foreign resident withholding tax regime now applies in respect of contracts entered into on or after 1 July 2016.
Subject to certain exceptions, purchasers of:
- direct interests in Australian real property worth $2 million or more; and
- most membership interests in an entity where more than 50% of the value of the interest is attributable to Australian real property interests.
from a foreign resident vendor under contracts entered into after 1 July 2016 are required to withhold and remit to the ATO 10% of the purchase price. The penalty for failing to withhold is equal to the amount that was required to be withheld and paid. An administrative penalty may also be imposed.
Some issues that have already started to appear since these rules have been operative include:
- the rules assume that all vendors of real property worth $2 million or more are a foreign resident, even Australian resident vendors, who must obtain a clearance certificate if they do not want to suffer the withholding;
- the legislation requires a clearance certificate that is valid for a period which covers the date of signing the contract. However, the ATO is currently unable to issue a retrospective clearance certificate (as at the date of writing). Accordingly, the ATO has indicated that they will accept a situation where the clearance certificate is valid and provided to the purchaser on or before the completion date. As best practice, we recommend vendors apply for a clearance certificate (to the extent applicable) as soon as a sale is contemplated;
- in the case of a membership interest where more than 50% of the value of the interest is attributable to Australian real property interests (eg certain shares), a clearance certificate is not relevant. The vendor should give the purchaser a declaration, stating that it is either an Australian resident or the asset is not taxable Australian property;
- it is unclear how the new rules (and specifically the clearance certification process) apply in relation to farmin arrangements relating to mining tenements. At first glance, it would appear that the original holder of the tenement (assuming they are Australian resident) will need to apply for a clearance certificate prior to entering into the farmin arrangement, and continue to update their clearance certificate through to the end of the term of the arrangement; and
- subject to further ATO clarification, it is unclear whether the exception applying to transactions on an approved stock exchange will apply in the context of a scheme of arrangement involving listed shares.
By Andrew Sharp and Mack Wan
ASIC does its due diligence on IPOs
A recent report by ASIC highlights its findings and concerns relating to IPO due diligence practices, and serves as a reminder that directors may be exposing themselves to unnecessary risks by taking shortcuts during the due diligence process.
For further details, see ASIC does its due diligence on IPOs dated 2 August 2016 by Sarah Turner and Kyle Moss.
ASIC simplifies company auditor registration
ASIC’s changes to auditor registration requirements are designed to reduce red tape while ensuring appropriate standards are met.
ASIC has released Regulatory Guide 180 Auditor Registration which simplifies and improves the registration process for prospective auditors. The relevant changes relate to:
- approval of a new competency standard for satisfying practical experience requirements developed by Chartered Accountants Australia and New Zealand, CPA Australia and the Institute of Public Accountants (which simplifies the competency requirements, takes into account new auditing requirements and adopts a principles-based approach);
- streamlining the application forms and supporting documents required to satisfy an hours-based experience test; and
- updating the professional indemnity insurance requirements for authorised audit companies and newly registered company auditors to ensure consistency with the limitation of liability schemes for professional accounting bodies.
ASIC will continue to accept applications prepared under its previous guidance until 30 June 2017.
ASIC releases results of its review of 31 December 2015 financial reports, and its focus areas for 30 June 2016 financial reports.
ASIC’s review shows a continued need for focus on impairment of non-financial assets and inappropriate accounting treatments.
ASIC has released the results from its review of financial reports for the year ended 31 December 2015, reporting that the largest number of its findings continue to relate to impairment of non-financial assets and inappropriate accounting treatments. In this regard, ASIC points to Information Sheet 203 Impairment of non-financial assets: Materials for directors which was issued in June 2015 to assist directors and auditors in considering whether the value of non-financial assets shown in a company’s financial report continues to be supportable.
ASIC has also released its focus areas for June 2016 reports and encourages directors and auditors to continue to focus on values of assets (including using realistic assumptions) and accounting policy choices.
Continuous disclosure and naming parties to transactions
ASX has clarified the obligations of a listed entity under the continuous disclosure regime to disclose the identity of counterparties to a material transaction.
ASX has reported that it has recently identified a number of listed entities that have announced a material transaction without disclosing the identity of the other party or parties to the transaction.
Following this, ASX has stated that:
- if a transaction is sufficiently material that it requires disclosure under the continuous disclosure obligations in Listing Rule 3.1, the identity of the other party or parties will generally itself be material information that must be disclosed (as it is required by investors and their advisers to understand the ramifications of the transaction and to assess its impact on the price or value of the entity’s securities); and
- where there is little to no information about the other party in the public domain (eg, because they are private companies), the listed entity should disclose a summary of the due diligence undertaken on the other party’s or parties’ capacity to perform their obligations in relation to the transaction.
Failure to comply with the above may lead to ASX suspending trading of the entity’s securities until the information has been released to the market.
ASX has also indicated that a listed entity will not be excused from disclosing an appropriate level of information about the other party or parties to a transaction on the basis that it is a party to a confidentiality or non-disclosure agreement that otherwise requires it to keep information confidential.
See also What’s in a name? dated 28 July 2016 by Sarah Turner and Vikram Kumar.
Other G+T Publications
Update on voting by responsible entities and their associates
The recent decision in Re AMP Capital Funds Management Limited  NSWSC 986 (which has now been upheld by the New South Wales Court of Appeal) has sought to clarify the uncertainty around the application of section 253E of the Corporations Act 2001(Cth).
For further details, see Update on voting by responsible entities and their associates dated 25 July 2016 by Adam Laura, Adam D’Andreti and Richard Francis.
Blockchain: the importance of creating new governance
There is no doubt that blockchain is changing the world – but we can’t throw out the traditional structures and constitutions without creating new foundations. Governance is just as critical as the technology in determining the success or failure of blockchain.
For further details, see Blockchain: the importance of creating new governance dated 21 July 2016 by Bernadette Jew and Peter Reeves.
@Work - New rates and thresholds from 1 July 2016
Employers should note the new rates and thresholds that apply from 1 July 2016.
For further details, see @Work – New rates and thresholds from 1 July 2016 by Dianne Banks, Kim McGuren, Clancy King and James Pomeroy dated 4 July 2016.
Full Court of the Federal Court re-affirms limits on the powers of shareholders in general meeting: Australasian Centre for Corporate Responsibility v Commonwealth Bank of Australia  FCAFC 80
The Full Court of the Federal Court has dismissed an appeal by the Australasian Centre for Corporate Responsibility finding that, in the absence of a power in a company’s constitution, shareholders in general meeting do not have a part to play in the exercise of powers which are vested exclusively in the board by passing a resolution which would express an opinion on the exercise of those powers.
The Australasian Centre for Corporate Responsibility (ACCR) (representing over 100 shareholders of the Commonwealth Bank of Australia (CBA)) gave notice to CBA pursuant to section 249N of the Corporations Act 2001 (Cth) (Act) of the following 3 resolutions that it proposed be moved at CBA’s 2014 annual general meeting (Proposed Resolutions):
- Proposed Resolution 1 (preferred option) - an ordinary resolution that “in the opinion of shareholders”, it was in the best interests of CBA for the directors to provide a report on certain matters relating to greenhouse gas emissions;
- Proposed Resolution 2 (as an alternative if Proposed Resolution 1 was not included for any reason) - an ordinary resolution expressing shareholder concern about the absence of a report described in Resolution 1; and
- Proposed Resolution 3 (as an alternative if Proposed Resolutions 1 and 2 were not included for any reason) - a special resolution to amend the CBA constitution to require the directors to report annually on certain matters relating to greenhouse gas emissions.
The 2014 notice of AGM (Notice) included only Proposed Resolution 3, together with a statement from the CBA Board that it did not consider the resolution to be in the best interests of CBA and recommending that shareholders vote against it (with reasons for the Board’s recommendation) (Board Statement).
Davies J in the Federal Court applied the decision of McLelland J in National Roads & Motorists’ Association v Parker (1986) 6 NSWLR 517, and concluded that:
- CBA was not required to put the Proposed Resolutions to the CBA shareholders, notwithstanding the terms of section 240O of the Act, unless they were referable to a power vested in the shareholders in general meeting (and not to the power of management vested exclusively in the CBA directors under the CBA constitution); and
- the powers of the shareholders in general meeting did not include a power to pass resolutions of the kind sought to be proposed.
In rejecting ACCR’s appeal against the decision of Davies J, the Full Federal Court (Allsop CJ, Foster and Gleeson JJ) found the following:
- ACCR was at pains to emphasise that the Proposed Resolutions would have no legal effect (and would not be binding on the directors) and as such, its submission was ultimately that shareholders have power to pass ineffective resolutions unless that power is expressly taken from them. Their Honours found that relevant case law tended against the existence of a power vested in shareholders in general meeting to pass an ineffective resolution;
- ACCR argued that the Proposed Resolutions were ‘required to be considered’ within the meaning of s249O of the Act provided that they were ‘validly put’, and they were validly put because the shareholders in general meeting had a legitimate interest in their subject matter. Their Honours found that this argument misunderstood the nature of the company as an entity distinct from its shareholders and directors, and that an act of the company (of which a resolution of the shareholders is an example) must necessarily be an act that the company has power to undertake. The powers and capacities of a company arise from its constitution and statute, and not the legitimate interests of its shareholders;
- ACCR’s contention that the Proposed Resolutions could be made in the exercise of CBA’s ‘plenary powers’ was based on the propositions that in the absence of some provision to the contrary, the shareholders in general meeting may exercise any power that the company is legally competent to exercise (with such power being the power to do anything which is not expressly prohibited by CBA’s constitution), and that, relying on section 124(1) of the Act, if an individual can express an opinion so can a company. Their Honours could see nothing in the legal powers and capacities of an individual which would support the existence of a legal power or capacity in the company in general meeting to express an opinion, by resolution, on a matter concerning the company’s management. ACCR was confusing legal powers and capacity with physical powers (in this case the power of free speech);
- the implication of a power involves the application of the principles concerning the implication of contractual terms and ACCR did not identify a principled basis for the implication of a power to put the resolutions to the AGM;
- section 250R was not an express power to put resolutions relating to management to the company. Section 250R(1) is not expressed as a conferral of power on the shareholders in general meeting to pass resolutions, and the inclusion of sections 250R(2) and (3) in fact reflects the absence of power otherwise to pass the resolution that is the subject of sections 250R(2) and (3); and
- in their view, McLelland J in Parker was saying (correctly) that shareholders in an AGM do not have a part to play in the exercise of powers which are vested exclusively in the board by passing a resolution which would express an opinion on the exercise of those powers. While that general proposition may be affected by a particular provision in the constitution of a company, no such provision applied in this case.
Their Honours also considered the language of the notice given by ACCR to CBA and upheld the primary judge’s view that it was open to CBA to include only Proposed Resolution 3. By expressing Proposed Resolutions 2 and 3 as alternatives if the other Proposed Resolutions were not included “for any reason”, ACCR gave CBA notice that it proposed to move one of the Proposed Resolutions, depending on the directors’ discretion as to which one they decided to include. Further, Their Honours found that there was no legal foundation for ACCR’s argument that the Board Statement went beyond what was required to fully and fairly inform shareholders to enable them to make a properly informed decision because it contained opinions.
Directors’ conflicts of interest – when is more than disclosure of the conflict and abstention from deliberations required?: Duncan v Independent Commission Against Corruption  NSWCA 143
This case demonstrates that the obligation of directors to avoid a conflict of interest may, in certain circumstances, give rise to a positive duty to disclose the facts relating to the conflict and not just disclose the conflict and abstain from deliberations, particularly where the conflict arises as a result of a director also being a seller to the company.
In 2011, the Independent Commission Against Corruption (Commission) commissioned an inquiry into the circumstances in which the NSW Government had come to issue a coal exploration licence to Cascade Coal Pty Limited (Cascade).
Key findings of the Commission included:
- a large portion of land within the tenement was owned by interests connected with the Obeid family;
- once the licence was granted, Cascade began negotiations with ASX-listed White Energy Company Ltd (White Energy) for the sale by the Cascade shareholders of their shares in Cascade;
- the appellants were all shareholders (indirectly) and directors of Cascade and all except for one were directors of White Energy; and
- prior to the proposed sale to White Energy, the appellants took steps to remove the Obeid family interests because the involvement of the Obeid family was seen to pose a potential threat to the value of the tenement, with the risk being that the licence might be terminated and a mining lease never granted if involvement of the Obeid family became known.
The Commission made findings of ‘corrupt conduct’ under the Independent Commission Against Corruption Act 1988 (NSW) (ICAC Act) against a number of individuals including the appellant directors, based on their failure to reveal information about the involvement of the Obeid family interests to an independent board committee set up to assess the transaction on behalf of White Energy and its shareholders (Committee), and their involvement in actions which were intended to deceive relevant public officials or public authorities of the NSW Government.
Amongst the issues on appeal to the New South Wales Court of Appeal were whether the appellants’ conduct was capable of constituting an offence for the purposes of sub-section 9(1)(a) of the ICAC Act by:
- failing to discharge their duties in good faith in the best interests of the company and for a proper purpose in contravention of section 184(1) of the Corporations Act 2001 (Cth) (Corporations Act); and
- dishonestly obtaining a financial advantage by deception as identified in section 192E(1) of the Crimes Act 1900 (NSW) (Crimes Act).
In relation to section 184(1) of the Corporations Act, the Court held that:
- the additional requirement for criminal liability under section 184(1) of the Corporations Act requires recklessness or intentional dishonesty, and intentional dishonesty involves both an objective and a subjective element, ie the conduct must be dishonest according to the standards of ordinary people and known to be dishonest by the accused;
- it was not disputed that the appellants had fiduciary duties to avoid placing themselves in a position of conflict when dealing with White Energy. The question was whether the steps they took (ie disclosing their interests and not involving themselves in subsequent deliberations by White Energy in relation to the transaction) were sufficient to avoid the conflict, and if not, whether their conduct could be said to be intentionally dishonest;
- there are circumstances in which a conflict will not be avoided by simply disclosing the relevant interests to the person to whom the duty is owed and withdrawing from participation in the transaction on that person’s behalf. In certain circumstances, there may also be a positive obligation of disclosure to protect the interests of the beneficiary of the duty;
- this was not a case of a conflict between the duties owed by the appellants to White Energy and duties owed to Cascade but rather, the conflict was between the appellants’ duties as directors of White Energy and as sellers of their shares in Cascade. It therefore followed that if the appellants were of the view that disclosure of the Obeid family involvement would be detrimental to Cascade, they could have avoided a conflict by simply withdrawing from the sale. It was not sufficient to merely disclose their interests and exclude themselves from the decision-making process of White Energy;
- having regard to the amount involved and the effect that disclosure of the Obeid family’s involvement was predicted to have (ie the appellants’ believed that the transaction would not proceed), it was open to the Commission to find that the appellants did not discharge their obligation to avoid placing themselves in a position of conflict of interest by merely disclosing their interests and abstaining from deliberations. The conflict inherent in selling effectively a flawed asset to a company to whom they owed fiduciary duties remained; and
- it was open to the Commission to be satisfied that there was intentional dishonesty not only where answers given by certain appellants to the IBC were designed to deliberately conceal the involvement of the Obeid family, but also in respect of another appellant who was not questioned by the IBC, but who was nonetheless deliberately silent.
- The Court also found that the offence of dishonestly obtaining a financial advantage under section 192E(1) of the Crimes Act was also made out.
The High Court backs the ANZ on bank fees: Paciocco v Australian and New Zealand Banking Group Limited  HCA 28
Last week, the High Court affirmed the Full Court’s decision that the ANZ’s late fees were not a penalty and were therefore enforceable in accordance with their terms. In so doing the Court signalled that it does not see the role of the courts as scrutinising private agreements and making adjustments to bring them into line with standards of reasonableness or fairness imposed by the courts. Exception fee clauses, such as those imposing fees by banks on customers for late payment of their accounts, will be enforceable other than in the most extreme cases where they are out of all proportion with what is necessary to protect the bank’s commercial interests. Contracting parties can reach agreement as they see fit, and they will be held to their agreement.
For further details, see The High Court backs the ANZ on bank fees dated 5 August 2016 by Steven Glass, Sabrina Ng and Ash Wickremasinghe.
A promise to “be looked after at renewal time” held to be too uncertain to be enforceable: Crown Melbourne Limited v Cosmopolitan Hotel (Vic) Pty Ltd  HCA 26
The High Court has held that a statement by Crown that it would ‘look after’ its tenant at renewal time in exchange for the tenant undergoing extensive renovations was too uncertain to be enforceable as a collateral contract, and also did not found an estoppel. Contracting parties are reminded of the need to be specific in their representations to each other, to reduce the possibility for dispute down the track.
Cosmopolitan Hotel (Vic) Pty Ltd (Cosmopolitan) leased two restaurant premises from Crown Melbourne Limited (Crown) for a period of 5 years. It was a condition of the leases that Cosmopolitan undertake extensive renovations. During the course of negotiations, Cosmopolitan sought to obtain a commitment from Crown to enable it to continue to trade for a further 5 years. However, Crown was unwilling to provide a further term and 5 year leases were therefore signed. At the end of the 5 years, Crown gave Cosmopolitan notice to vacate and Cosmopolitan brought proceedings against Crown alleging that Crown had made a statement promising Cosmopolitan that if it undertook the renovations, it would be “looked after at renewal time” (Statement).
Following proceedings in the Victorian Civil and Administrative Tribunal and the Victorian Supreme Court and Court of Appeal, the 2 key issues before the High Court were whether the Statement:
- gave rise to a collateral contract; or
- created an estoppel.
A majority of the High Court (French CJ, Kiefel and Bell JJ – in a joint judgment, and Keane J and Nettle J in separate judgments (with Gaegler J and Gordon J dissenting)) found that there was neither a collateral contract nor an estoppel.
French CJ, Kiefel and Bell JJ found that there was no collateral contract because the Statement could not possibly have been understood to bind Crown to offer a further 5 year lease as “it did not have the quality of a contractual promise of any kind”. Their Honours saw the problem regarding the enforceability of the obligation as not so much one concerning the uncertainty of its terms as the lack of them, and found that on basic principles, there can be no enforceable agreement to renew a lease, breach of which sounds in damages, unless at least the essential terms have been agreed. There was no evidence to support a finding that Crown was likely to stipulate terms that had a reasonable correspondence to the existing terms. This was a matter for Crown’s discretion.
On the issue of estoppel, French CJ, Kiefel and Bell JJ noted that for a representation to found an estoppel, it must be clear and the language must be precise and unambiguous, and it must be able to be understood in a particular sense by the person to whom the words are addressed which then forms the basis of the assumption or expectation upon which that person then acts. In this regard, their Honours found that the Statement was not capable of conveying to a reasonable person that Cosmopolitan would be offered a further lease, and moreover, there was no evidence that Cosmopolitan acted upon the basis of an expectation that there was a promise that the leases were going to be renewed for a further 5 years.
Keane J also found that there was no collateral contract. Crown remained “legally free to act in its own interests in negotiating a future lease” and the terms on which an agreement might be made could never be more than “unresolvable speculation”. Accordingly, even if the Statement had been incorporated into the lease, it would not be sufficiently certain to be enforceable as a promise of the grant of further leases.
Keane J also found that the Statement could not give rise to proprietary estoppel. Cosmopolitan submitted it had always contended that proprietary estoppel formed the basis of their estoppel claim (because performance of the collateral contract would have secured a further 5 year leasehold interest in the premises) and that it was only the reasoning of the Court of Appeal that their claim was categorised as one of promissory estoppel). Leaving this issue aside, Keane J found that there was no proprietary estoppel because any interest in land to be granted to Cosmopolitan necessarily depended on reaching an agreement upon the terms of an enforceable agreement for a lease.
Nettle J concluded that a reasonable person could not have construed the assurance to look after Cosmopolitan as a binding promise to extend the lease for a further 5 years, and as such, there was no collateral contract. In relation to estoppel, Nettle J dismissed Crown’s argument that because the Statement lacked contractual certainty, a claim for estoppel should fail. The determinative question is the part that the party sought to be estopped has played in creating an assumption or expectation in the mind of the claimant, in reliance on which the claimant has acted to his or her detriment.